Why Extreme Transparency Requires Extreme Trust

In the 1970s a man won the Spanish lottery with a ticket he’d specifically chosen for its ending number of 48, as recalled in Stanley Meisner's The Drunkard's Walk. Very proud of his "strategy" for winning, he explained: "I dreamed of the number 7 for seven straight nights, and 7 times 7 is 48."

As thinking creatures, we are all masters of pattern recognition, and we see the world around us in a cause-and-effect way, whether interpreting lottery winnings or a business success. Unfortunately, the world is inherently, marvelously, not predictable, so despite its evolutionary advantages, our talent for pattern recognition and cause-and-effect reasoning, along with our natural human biases, can easily undermine our rationality and taint the way we interpret things. In business, most managers are biased to believe the effects they generate through their own actions are greater than they really are. Almost 90 percent of Chief Marketing Officers, for instance, believe that customers trust their own company’s brand as much as or more than they trust competitors’ brands!

As technology continues to make our world more and more transparent, however, companies that are proactively trustworthy (that is, "trustable") will be watching out for their customers’ genuine self-interest, rather than simply exploiting their emotions and biases. A trustable company will find ways to use customers’ natural biases to work for them—to improve their lives or better solve their problems.

Consider how credit card companies operate, for instance. It’s well known that one of the secrets to every credit card’s success is the natural (but irrational) bias we all have toward short-term, instant gratification. To demonstrate this bias, two MIT professors once conducted an auction of Boston Celtics tickets, telling half the participants that they had to pay with cash, and the other half that they had to pay with credit cards, as described in Jonah Lehrer's How We Decide. After averaging the bids for the two groups, they found that the average credit card bid was twice as high as the average cash bid!

Obviously, it’s in no customer’s self-interest to fall victim to irrational short-term thinking, although the traditional credit card business model is based on the fact that many customers will. For most credit card companies, a marginally sophisticated borrower who can never resist spending, rolls his balance from month to month, and often incurs late fees is considered a most valuable customer. In fact, the common industry term for a credit card customer who dutifully pays his bill in full every month is "deadbeat."

But if a credit card company were actually trustable, how would it operate? For one thing, rather than encouraging spending and borrowing, a trustable credit card would counsel its customers to spend wisely and use the card prudently. (Think of the utility company urging you to turn off the lights or adjust the thermostat when you leave the house, for instance.) It would provide incentives for customers to pay off their balances, perhaps reducing the interest rate applied when a balance is reduced. Such a company would be careful not to earn too much of its profit from late fees, which would indicate a flaw in the business model, and it would text or email a reminder a few days before a payment is due.

Imagine being offered a credit card by a highly trustable issuer. Rather than exploiting your instant-gratification bias, such a trustable credit card might even use this bias to craft an incentive to promote more long-term saving. For instance, it could offer you a savings account fed by an extra charge applied each month to your bill, so that the more you spend in the present, the more you save for the future. What if, for every dollar you charged on your card you were charged $1.05, with five cents going into a savings account (or you could specify some other amount)?

To help you rein in your own spendthrift ways a trustable credit card company might ask you to set a monthly spending budget, and then text you during the month to keep you apprised as you "use it up." If you get to the middle of the month and you’ve already spent more than your planned budget allows, at least you’d know.

To operate in this way, a credit card company would have to make some changes to its business model. There’s a lot of short-term profit to be made by encouraging consumers to borrow and spend, regardless of their own interests, so a trustable credit card issuer wanting to remain in business will first have to figure out how to make money from more customer-friendly activities.

As far as we know, there are no genuinely trustable credit card companies yet. We predict there soon will be, however, in the same way there will soon be more trustable auto companies, telecom firms, airlines, retail banks, and other businesses. We are confident in our prediction for the simple reason that technological progress is inevitable, and as interactive technologies continue to advance, transparency will continue to increase. The more interacting we do, the more transparent things will inevitably become. From WikiLeaks and the Arab Spring, to a cable-TV repairman asleep on your couch or an airline’s luggage handlers mistreating bags, people will inevitably find things out.

Transparency increases the cost of hiding the truth. And extreme transparency will soon require extreme trust.